The Social and Economic Utility of Capital Markets

Economic activity is not simply for the benefit of those involved; it also serves a social purpose, or it is ordinarily not permitted. For example, dealing in heroin is an economic activity that the United States believes serves no social purpose and so prohibits. People who participate in capital markets assert that capital markets serve several major social purposes—including that they are crucial to innovation and therefore improving living standards. Capital markets are said to fund innovation, and innovation to drive our economy, an argument given its modern formulation by Joseph Schumpeter in the 1920s and 1930s. Innovation improves living standards either directly, through new products and services, or indirectly, by driving up productivity in producing existing products and services.

Western capital markets, especially those in America and Europe, claim to be the best in the world at allocating capital to competing uses, especially among likely innovations. The markets are said to be large, highly developed, efficient, and transparent (and thereby worthy of investors' trust). Because of these features, western capital markets are able to pour investment dollars into innovations and push them ahead much faster than would otherwise be possible.